Value added tax (VAT) is a complex area and it is imperative for business owners to seek advice from experienced accountants for unusual transactions where the VAT treatment may not be clear. VAT inspections are increasing due to aggressive stance taken by HMRC and mainly if there is any repayments HMRC would visit the client site and inspect all records physically. In general, a business will be visited within the first couple of years following registration and later at random intervals depending on the business type, size and perceived business complexity. In some cases, VAT visits may also be triggered by a poor compliance history (late filing of returns, missed deadlines, or errors in returns) as well as atypical dissimilarity in the VAT payment.
Reasons for a VAT Visit
As stated above, a VAT investigation usually is triggered by either:
- a routine VAT inspection that uncovers irregularities, or
- as a result of an unusual declarations and repayment claims, or
- if the business operates in a sector deemed 'high-risk' by HM Revenue and Customs (HMRC)
Depending on the severity of the suspected offence, HMRC can decide to put into effect their power under the Civil Investigation of Fraud procedures or, if the offence is too serious, HMRC can even launch a criminal investigation (successful trial of criminal cases normally results in imprisonment).
When an inspection takes places, the business will be required to produce all applicable documents (books of accounts, financial statements, prior year returns etc.) for inspection and maybe required to attend an interview by HMRC. As a cautionary measure, it is highly recommend that the business should contact their accountants as soon as the business is made aware of HMRC’s intentions. Informing a qualified accounting firm like DNS Accountants will help the business to be properly represented at every stage of the process. Once the investigation is complete, HMRC will issue the business with an assessment of the VAT understated or over-claimed, along with a penalty (if applicable).
Reducing the frequency of visits
Depending on the size of business, a VAT visit may last from a few hours to more than a few days. Most of the time, a VAT officer will work with the information they have about the business but in certain cases they will still require inputs from the business. As a result, such visits are a disruption for the business and hence, are best avoided if possible. Few simple measures that a business can take to minimise the frequency of VAT visits is by:
- Making sure that the business submits the VAT returns as well as pays the applicable dues on time. Doing so, will also help the business avoid interest and penalties
- If the business VAT return is not in proportion when compared to previous returns. For example, if the business normally has a VAT liability and the current return shows a substantial repayment. In such a scenario, the business must contact the VAT office and explain the unusual return
- If the business makes a kind of error where a voluntary disclosure is required, it is useful to provide a detailed explanation as to how the error arose. Also, explain how it does not extend beyond the indentified error, and how it has been calculated. To be in the good books of HMRC, it is worth explaining what measures have been taken to ensure that such issues will not take place in the future
VAT inspections and preparation
For a business, it is inevitable that there will be a VAT visit at some stage. Areas where problems frequently arise include:
- The flat rate scheme where businesses continue to use the discounted rate. Sometimes, a business might end up using a wrong rate, thereby, failing to calculate the flat rate VAT on the gross of standard rate supply
- Partial exemption problems (incorrect recovery of input VAT that relates to exempt supplies, as well as incorrect partial exemption methods)
- Land and property transactions
- Non-business use of goods and services
- Recover of VAT on blocked items such as cars and staff recreation
To be well prepared for a VAT inspection visit, businesses should ensure that all records are available and properly organised. Further than the sales and purchase invoices, accounting books and bank statements and records, the officer will also want to see the VAT account which should be up to date. Once the officer completes his visit, the officer will discuss his findings with the business owner or the person responsible for compliance and will usually follow this up with a letter to which the concerned person will have to respond in an appropriate manner.
Penalty rates for inaccurate VAT Returns
The penalty rates for an erroneous VAT return depend on why the error was made (serious the reason, severe the penalty can be). The penalty is computed as a percentage of the tax unpaid, over-claimed, understated, or under-assessed. In addition to the penalty, the business will also have to pay the VAT and any interest due.
|Reason for the error||Disclosure of the error to HMRC (A disclosure is unprompted if at the time the business tells HMRC that they have no reason to believe HMRC have discovered it, or are about to discover it)||Minimum penalty||Maximum penalty|
|Careless(the business failed to take reasonable care)||Unprompted
|Deliberate (the business gives HMRC a document which is inaccurate)||Unprompted
|Deliberate & Concealed (the business gives HMRC a document that is incorrect and have tried to hide that inaccuracy)||Unprompted
How can DNS Accountants help during VAT inspection
With good record keeping and a structured approach towards business’ finance there is no need to fear a VAT inspection. If the business has any concerns regarding VAT inspection preparation please do not hesitate and contact DNS Accountants. We are one of the leaders in taxation and accounting in the UK and our team includes well-read taxation professionals and ACA's or Chartered Accountants (CAs). They have years’ of experience in dealing with VAT visits and inspection preparation. If a business has missed filing their VAT returns or is unclear about how to file a VAT return, please get in touch with us at www.dnsassociates.co.uk. We lay emphasis on delivering outstanding customer service, and believe in offering unmatched client service. DNS Accountants offers services at a nominal rate and helps clients with tax planning, VAT returns and other accounting services.
Our team works with clients to enable them grow the business and maximise profits. Our services comprise of VAT planning and filing returns, payroll services, bookkeeping and accounting services, self assessment, auto enrolment, individual and business taxation, property tax advisory and consulting services for construction industry. Our additional services include:
- Supporting clients to set up their business bank account based on their needs
- UK limited company formation for non-residents
- Company formation services including bank account opening, and registration of pay-as-you-earn (PAYE) and value added tax (VAT)
- Tax investigation cover service
- Preparation of year-end accounts
- Preparing business plans